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Friday, October 11, 2013

Troubled CMBS Debt to Get Permanent Homes

Summary: CWCapital Asset Management LLC, a loan servicer, is eager to unload troubled mortgages from their book. It would seem they fear on missing out on an easy lending environment (rising property values, low interest rates).

--(WSJ Blog)--

Firms overseeing troubled commercial real estate mortgages may suddenly be in a hurry to sell the debt after years of trying to find a better solution for investors.

The $2.57 billion sale of mortgage loans and commercial properties from CWCapital Asset Management LLC in coming months suggests the loan servicing firm may want to take advantage of rising prices and investor demand before they fade, perhaps at the hands of higher interest rates, said Harris Trifon, head of commercial and asset-backed bond research at Deutsche Bank.

The Moody’s/RCA national all-property composite index has increased 42.1% from the trough in December 2009 to July this year, a period largely accompanied by falling interest rates. Lower interest rates can make buildings more valuable because it takes less revenue to support debt.

“Values (of commercial properties) have increased throughout the year, especially for core central business district markets, Mr. Trifon said. Rising interest rates, such as the jump seen in May and June, are “not going to be conducive to higher property values,” meantime, he added.

In aggregate, the sale of mostly office properties is the largest of its kind and only the third that has exceeded $1 billion in the last few years, Mr. Trifon says.

The source of such sales has already been declining as CWCapital and other “special servicers” have made significant headway in resolving loans in properties overburdened with debt. In September, about $53 billion of loans sat with the servicers, down from the peak of nearly $90 billion in late 2010, according to Trepp, a CMBS data provider.

CWCapital decided to sell the portfolio based on its recent transactions, and to capitalize on improvements in debt funding as well as the real estate recovery, David Iannarone, CWCapital’s president, said in a statement.

Some of the buildings in the CWCapital portfolio may have been held in a distressed state for years as the servicer sought ways to reduce losses to bondholders. A sale too soon could mean a fire-sale price, but fees and other expenses to bondholders can rack up as a defaulted loan goes unresolved.

CWCapital won’t publicly identify the properties, but the list probably includes some of the most storied commercial real estate assets financed at the peak of the real estate boom, Mr. Trifon says. Among them could be Two California Plaza, a Los Angeles office tower dogged by low occupancy and part of one of the largest commercial mortgage-backed securities ever sold.

As the default specialist, CWCapital began servicing the building’s $470 million loan in December of 2010, and foreclosed on behalf of investors a year ago, according to servicing notes posted on Trepp’s website. A January appraisal put the building value at $343 million, about 54% of the estimate when the loan was packaged into CMBS in 2007.

In addition to losses dealt to riskier slices of the bond, senior investors may also take a hit, warned Mr. Trifon. That’s because principal is repaid to the senior bondholders at face value, below the current premium price that accounts for the bond’s higher interest rate.